Getting started on the property ladder so you can build a real estate portfolio can sometimes be tricky. It’s a serious investment and there are lots of things to consider. So what should you do to make sure the actions you take are the right ones? Here is our guide to five key areas to consider and what you should know when it comes to creating your real estate portfolio.
Keep Your Personal and Business Property Portfolio Separate
It is often a very good idea to have your business premises, if you own them, and your commercial real estate managed as two separate companies.The first can be the original company that runs the operations. The second can be a "prop co" that owns your property.There are key reasons for this. The first is tax benefits. The second is you have another income stream. It also keeps the two entities separate, thus allowing the business owner when the time comes to sell the property as and when, while their real estate portfolio is a stand alone.
In a lot of cases, if the business is sold but remains in the premises, the property owner can then continue to draw rental fees from the business. The process is fairly simple. If your property is put into the prop co, you can take a loan against the property, and charge rent to the operations company. Then you have a taxable deduction for the operational company. And the interest you pay on the loan for the building can then be seen as deductible for the prop co. It means you can bring your taxable income down to a minimal amount. It’s something which many companies see as a profitable option, and they can take the tax deductions rather than continue to rent. This also enables a growth avenue for you – if your business becomes bigger than your current property, it means you can purchase another property through your prop co. Then you can lease the previous building to another business. So you are building up your property portfolio in the process.
However, if you still haven’t outgrown your first property, but your loan has been cleared, this means you can continue to build your portfolio. When your property is paid off, you can bond it again, purchase another property and keep reaping the benefit of the tax deductions with the interest you pay on that loan. The most important thing to remember is when you own a commercial property, does the operations company have the ability to afford the rental, and does it have a good future. If you end up in the situation where you can’t get a tenant and you aren’t in the building, the prop co is in danger of defaulting on the loan. Then you could end up losing the property.
Stay Objective When You Are Looking to Purchase Your Property
Many business owners purchase property, which they are renting, because they don’t want to be paying rent to anyone else. This is an emotion led purchase, and is not the way to go about growing your portfolio. You should consider every factor when looking at purchasing a property. If you are in a property and running a business out of it, often you have an inflated idea of what the value is. This is because you have invested time, effort and money into the building. The landlord knows this, knows the business is anchored there and can take advantage. This leads to the purchaser having to pay a higher price. You should consider the pros and cons of the property. What is the true reason you want to buy it? You need to take everything into account. Make sure you are close to the market and check out other buildings, which are in the vicinity. Investing your capital in a building should only be an option if you truly believe the capital is better used in a property rather than investing elsewhere. You need to take into consideration how much disposable income there is to use.
Make Sure You Carry Out Plenty Of Research On The Property
When you first look into purchasing real estate, there is a wealth of information available to you. But many people have no idea what they can actually access.Professional valuation firms are very helpful to make sure you have a good idea of what is available and that the cost is fair. And these kind of firms have a lot of data which can be used to help make a decision.
Other things to take into consideration are:
*Capitalization rate to yields on the rent
*Average vacancy rates,
*Highest rates you can get in that area as well as average rates
*Price per square meter
All these aspects can help you determine if the value is good for you.Taking advice from a trusted consultant is very important when making decisions on your purchase. This is a large capital outlay, and then you could be servicing large loan. It is integral to get advice. When you use a commercial property broker or a valuator, or a property finance company, you get insightful information.These people are highly skilled and can really assist in giving you what you need to make the right purchase.This means when you make you real estate decision, you are backed by strong metrics and considered opinions.
Make Sure You Buy At The Right Time
Property is proven to outperform inflation. And commercial real estate property can usually be quite predictable when it comes to rentals as well. It is not unusual to consider a yearly increase of 6% to 8%. However you need to think about the work which will be included in maintaining the property. Owning a building can be a massive distraction, which is why many owners use a management company. It’s also a long term commitment. And interest rates can have an impact on the best time to buy.As rates go down, this is when you should consider purchasing.
Think About The Other Revenue Streams Your Property Can Bring
When you have bought a property, you need to think carefully about the best way to use it. Your property is not the only way you can generate income.For example, are you in a great position to offer billboard advertising, or building wraps?
Investors will often look at all the other ways they can monetize their building. And this is what sets them apart from business owners.They look for multiple income streams. And because they are growing their portfolio, they get good at spotting and using opportunities.
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